When you’re trading money in Forex, you don’t do it blindly. There are a lot of factors that influence a forex trader’s decision. There is a lot of thinking and going over statistical data and technical indicators to perceive the market situation. That is why Forex analysis is very crucial so that you can make calculated decisions based on past trends and current facts.
Before we go ahead with the different types of forex analysis, let’s brush up on our definition of Forex analysis.
What is Forex Analysis?
A forex market is a place where traders buy and sell currencies with the ultimate goal of extracting huge profits. Forex analysis involves examining the changes in the currency pair prices to isolate where the direction prices might go in the future. You predict the changes so that you can make profits from the currency pair movements.
Types of Forex Market Analysis
Now that you’re all caught up with the basic definition of forex analysis, let’s see the different types of forex market analysis. Generally speaking, the forex market analysis is broadly divided into three types.
Technical Analysis
It is the systematic study of price variations in a particular asset. The main objective of technical analysis is to recognize trends and patterns, make calculated decisions about price movements.
There are several ways that technical analysts use to identify trends in the forex market. Let’s delve deeper into some of the most common ways that technical analysts use to make predictions.
- Chart Patterns: Analysts use drawing tools like trend lines, horizontal lines, and Fibonacci levels to classify the chart patterns into consolidation patterns and symmetrical triangle formations. These patterns help to identify the strength and weaknesses of sellers and buyers in the market.
- Indicators: If you want to understand the market situation better then technical indicators are a great help. You will easily be able to identify when the market is oversold or overbought, whether there is falling or rising momentum, etc.
- Candle Patterns: In this method, analysts will use candle charts that represent the open, close, low, and high price levels restricted to a particular timeframe. This is used to predict the behavior of the sellers and buyers for a small period.
Financial markets in forex briefly do 3 things: move down, up, and sideways. However, prices on the other hand go in a zigzag manner that is why the price has only a couple of states:
- Range: This is when the prices are going zigzag sideways
- Trend: This is when the prices are either zigzag higher (bull trend or up trend), or the prices are zigzag lower (downtrend, or bear trend)
What is the importance of technical analysis?
Technical analysis is the only way you can identify repeating patterns and trends and make sound decisions. The patterns and trends are a huge help to check the current condition of the market. Technical analysis is a crucial factor that can determine when and where you should enter or leave the market.
Types of indicators you need for technical analysis of forex market
There are broadly four groups of indicators that are used for technical analysis. Let’s see some of the most popular ones.
- Trend indicators:
- Average Directional Index (ADX)
- Moving Average (MA)
- Moving Average Convergence/Divergence (MACD)
- Ichimoku Kinko Hyo
- Parabolic SAR Indicator
- Momentum:
- Stochastic Oscillator
- Relative Strength Index (RSI)
- Williams % range (%R)
- Volatility:
- Bollinger Bands (BB)
- Average True Range (ATR)
- Standard Deviation
- Volume:
- Money Flow Index
- On-Balance Volume
- Accumulation/Distribution line
All of the above-mentioned indicators are very popular in the technical analysis of the Forex market. However, volume indicators are more suited to exchange markets because the trading volume is the crucial source of data. The studies of the total traded volume are beneficial to stock market traders, future market traders, and commodity traders. This is because the process of buying and selling goes through a single central exchange.
Since the forex market is traded over the counter, the total volume is subjective to a single broker. It depends on what banks and funds they get their pricing from. The technical indicators that use volume indicators are only using a small portion of the data volume that’s why it is not a real representation of the big picture.
You might find it overwhelming to select from such a broad range of technical indicators. Worry not! Start by exploring the most popular ones and slowly move on to other ones to see which ones work for you.
Advantages of Technical Analysis
- Forex technical analysis is possible with a couple of simple tools that you can get free with any trading platform.
- Forex technical analysis can occasionally give high probability directional reports which can show entry and exit points from the market.
- You can explore an extensive range of technical analysis tools that you can use as trading setups.
Disadvantages of Technical Analysis
- Since Forex Technical analysis is a popular method across the globe, it can generate abrupt market movements if several traders come to the same conclusions.
- Forex technical analysis in itself is not enough. There are markets where you will have to combine fundamental analysis and technical analysis to understand the real market condition.
What is the use of technical analysis?
Technical analysis is useful due to the fact is that forex markets are chaotic. However, the price action is not that random. So technical analysis bridges that gap by finding the sense in chaos by identifying trends and patterns that tend to repeat!
There’s no secret formula of technical indicators that will make the ultimate trading strategy. As a rule of thumb, you must have a good risk management strategy, discipline, and patience when it comes to getting results. The key to successful trading is to find the probabilities and making trades when the odds seem to be in your favor.
Fundamental Analysis
Fundamental analysis in the context of Forex trading mainly stresses on al the global aspects and influences on trading. It includes the influence of global factors on the demand and supply of equities, commodities, and currencies. It is a type of market analysis that requires examining the economic status of the countries to trade currencies.
From every political statement made by politicians to every impact of the economical events on the trade market, is properly studied. At times fundamental and technical analysis both are utilized to determine the right place to trade. But sometimes, these analyses can end up contradicting each other too!
So, if you tend to base your opinions on fundamental analysis, the below-listed factors can prove to be useful.
Economic Releases
Basing your decisions on economic releases can be a rather dicey move. Well-known economists predict multiple economic figures based on their previous trends and statistics too. However, predicting the correct result of the consensus is very difficult as the markets are highly volatile.
Thus, even though these predictions are made based on conventional and proven models, they can go horribly wrong at times. This is why investors tend to rely on the consensus of reliable experts to predict how the market may move. This way they trade according to the consensus before the final results are released.
If the consensus fails, the market can either unfold a much better or a much worse outcome. Thus, a trader can either choose to bet on his opinion, take risks, and trade before the results are released. Or, he can tread into the market after the results are known to avoid the risks due to volatile shifts.
While both the options have their upsides and downsides, the trader must choose what suits them better.
Geopolitical Differences
Global tensions are also one of the major factors that impact market flow. Conflicts, wars, and discrepancies between the countries can adversely impact the trade and thus the market. For tradable commodities, the supply and demand in the market are greatly impacted by the geopolitical conditions.
At times, even a calm relation between two countries can ease the market and lower the price of the commodities. Knowledge of geopolitical tensions can thus help a trader to make reasonable choices and reliable predictions.
Interest Rates
Given the authority to take major actions, international/central banks can also cause high market volatility. They can control the interest rates and can significantly increase, drop, or keep them stagnant. Other than these they can release policies, make unpredictable interventions, and even revalue their currency.
As the interest rates are increased, the currency value also increases significantly. Thus, a favorable shift in currency values or interest rates can majorly shift the interests of the investors. By an analysis of the same, while taking into account all the related speeches and declarations, a trader can benefit.
Weather Shifts
Weather-related events and catastrophes also impact the market by creating price fluctuations in the affected regions. They can alter the prices of tradable commodities and thus create unpredictable conditions. For instance, the price of natural gas goes up as soon as heavy snowstorms begin their trails.
Similarly, other factors can also alter and a trader must pay close attention to the weather updates to make the right market predictions.
Others
Other than these, the factors like seasonality also affect the market shifts. A lot of investors begin exiting their positions as soon as the year-end inches closer. Or as the calendar year draws to a close, people start selling their equities to claim their losses on the taxes.
The current employment scenario of the nation also hints at the status of the nation’s economy. Factors like national budget, trade balance, treasury, etc. can help an investor predict the currency value shifts. Additionally, the GDP is also a clear indicator of the nation’s economic status in the global view.
A deep fundamental analysis of these and multiple other factors can aid in determining the direction of the market shift. The factors considered for evaluation here can either impact the trade routinely or unpredictably. For a trader, it is essential to keep up with his/her knowledge on these subjects to make an accurate prediction.
A high level of alertness concerning global situations is essential when it comes to fundamental analysis in forex trading.
Sentiment Analysis
In the context of the forex market, a sentiment stands for how the majority of investors feel about a certain situation. Every reader might react differently in different situations given their own set of beliefs and knowledge. Gauging the sentiment of the traders about a particular situation gives an idea about their next move.
Sentiment analysis is examining the market psychology to predict how the price and the market will move in the near future. It captures the overall feeling of the traders about a particular currency pair’s performance. This way you can learn about the majority’s take on a trading situation which can help you decide for yourself.
Sentiment symbols used in the forex market
In a Sentiment analysis, the mood of the market is defined by mainly three moods. They are- bearish, bullish, or sideways/flat. These 3 situations are the ones that you can spot and determine the sentiments with them. The bullish sentiment is used to describe an optimistic view reflecting that the investors are more interested in buying.
However, on the other hand, bearish sentiment is more of a pessimist outlook on market trends. It thus implies that investors are more likely to sell than buying. Thus, an uptrend in the prices suggests a bullish sentiment whereas a fall in prices suggests a bearish sentiment. However, flat/sideways symbolizes a stagnant market.
Risk appetite is also one of the factors considered for sentiment analysis. Here, low-risk appetite and high-risk appetite are used to determine the market condition.
What is Risk Appetite?
It is a measure of how risky a currency pair is being viewed by the traders given the current market conditions. Here, when the investors are optimistic about the conditions, they tend to buy riskier pairs. This is termed as ‘risk-on’, which states that the currency pairs with higher potential will gain a higher demand by the investors.
A currency pair is termed as ‘risk-on’ mostly when its value changes quicker than usual in a short period. On the contrary, ‘risk-off’ is the term used to state a pessimistic mood of the traders regarding a currency pair. It implies, that the particular currency pair is not likely to generate profit but can be a safe investment.
It reflects that a potentially lower-yielding currency pair will gain a higher demand. A currency pair is mostly termed ‘risk-off’ when it’s value remains unchanged in a short period.
Sentiment analysis can be made by taking a variety of factors and concerns into consideration. However, below listed are some of the most common ways used for the purpose:
- Broader-View Analysis
To determine the dominating sentiment in the market a much broader view of the price shifts is examined here. You can do this by checking the market changes for a longer frame of time, for instance, weekly. By viewing the net movement of the market you will be to capture the net sentiment of that market.
A market evolved in a longer interval is sure to display a certain trend. By examining and capturing this trend, you can determine the most resonant sentiment in the forex market.
- Using Sentiment Indicators
The second way to determine the market sentiment is by utilizing sentiment indicators. This is a numerical tool that displays the side of the market which is being focused on more. By providing numerical figures or percentages of the number of people opting for a particular side, a common interest can be captured.
This helps trade to determine if the particular currency pair is being dominantly sold or bought by the traders. Trading more or less encourages the ‘follow the herd’ mentality amongst the traders. This is why sentiment indicators are used to reveal the dominant sentiment of the market.
If the price of a currency is predicted to increase, people tend to buy it whereas in the opposite case, people will sell it off. This is the most natural human instinct in terms of trading which also resonates with the idea behind sentiment analysis.
- Economic and Fundamental Aspect
Lastly, this method focuses on the current economic status and standing of the company. It utilizes fundamental analysis to understand the global scenario and to determine the economic well-being of the nation. By making use of the most prominent economic indicators, an investor can easily determine the potential impact on the currency/trade.
Each method of sentiment analysis has its own set of strengths and weaknesses. However, when combined with fundamental analysis, you can manage to determine the right net sentiment.
Final takeaways
Now that you’re acquainted with the different types of forex market analysis, you can select the method depending on the market. While all these types are very different from another, you should know that there is no single secret formula to make the right or wrong trades. It’s all about how you can predict future market movements and make wise decisions.
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